If you must go to court to see whether you are going to arbitrate your dispute, you have lost at least part of a key advantage of arbitration: saving time and money by avoiding court. The thing that is mostly likely to put you in court is a poor arbitration clause. Today we focus on a case that illustrates the problem.
First, we shall mediate
Arbitration clauses that require the parties to mediate before filing an arbitration demand have become popular. And for good reason. Done right, mediation can get disputes resolved efficiently, help preserve business relationships, and let everyone get back to business. Many business disputes are caused by misunderstandings and lack of information by decisionmakers that can be dispelled by a quick mediation. So, it makes sense to require that the parties try mediating before invoking arbitration. Arbitration is sure to be more expensive and time consuming than mediation.
The best laid plans . . .
Of course, mediation makes complete sense when both parties see it as a good way to solve a problem and move on. But what happens if parties never get around to mediating? Let’s see.
Porta potties, mediation, arbitration, and court
Burke v. Roberson, No. 01-19-00920-CV (December 17, 2020, Tex. Civ. App.) involved a dispute between the members and managers of a company, UEW, that supplied porta potties to Texas oilfields. Business was off when the oil business took a downturn. Mr. Burke thought his distributions were too low and that other members and managers of the business were cheating him. He demanded arbitration under UEW Agreement’s arbitration clause. The clause was pretty simple. Maybe it was too simple. It read:
Except as otherwise provided above by Section 12.1, any controversy which touches on or concerns this Agreement shall be resolved by mediation, and if such mediation is unable to resolve the controversy then exclusively by binding arbitration administered pursuant to American Arbitration Association rules then applicable for commercial disputes.
It isn’t clear whether the respondents received Mr. Burke’s mediation demands. But we know mediation never took place.
Mr. Burke then filed an arbitration demand. He said in the demand all conditions precedent had been met and that the respondents “failed and refused” to mediate. It isn’t clear whether respondents got notice of the arbitration demand. But we know they did not appear at the arbitration hearing.
So, an arbitration hearing was held without them. Under AAA rules, there are no defaults. The arbitrator said AAA had assured him he had jurisdiction. He found in favor of Mr. Burke and against the respondents. That’s not too surprising, since respondents did not provide their side of the story.
Not so fast
Mr. Burke moved in court to confirm the award. The respondents moved to vacate the award. The court vacated the award, but didn’t say why.
Mr. Burke appealed. Recognizing that an arbitration award has the “same effect as a judgment of a court of last a resort” and “all reasonable presumptions are indulged in its favor . . .,” the Texas Court of Appeals still upheld vacation of the judgment.
“How so?” you may ask. The court found that mediation was a condition precedent to arbitration, and it was not met. Mr. Burke argued respondents waived that condition by ignoring his demand to mediate. The court disagreed. Waiver, it said, cannot be implied by a parties’ inaction.
Mr. Burke also argued, that whether the respondents mom waived the condition precedent was for the arbitrator to decide. Not so, said that court. Because there was no factual dispute that the condition precedent was not met, that issue was for the court. Because there had been no mediation, the condition was not met, and the arbitrator exceeded his powers in making the award.
Lessons, alternatives, and a curiosity
Mediation is great, but not at the price of foreclosing arbitration. Requiring mediation without more is likely to cause problems.
If you are determined to require mediation before an arbitration demand can be filed, you need to put into the clause how mediation should be demanded, how long the parties have to get the mediation done, and that mediation is waived if the mediation is not completed in time. Then you will need to prove you made the demand properly and the other party failed to timely comply with the mediation requirement.
Just keep it simple?
But that gets complicated. It may be better to just skip the whole thing. The parties can always mediate if they want, even if a party first files an arbitration demand. And at least the parties and mediator can read the demand to know what’s in dispute.
What is an arbitrator to do?
What should an arbitrator do when faced with a situation where mediation is required, but the demand is filed before there has been mediation? There are a couple of alternatives. One is for the arbitrator to simply decide he or she has no jurisdiction because a condition precedent has not been met. This isn’t completely satisfying because it requires ceasing the arbitration, leaving Mr. Burke to somehow enforce the required mediation provision, and starting another arbitration if the mediation doesn’t work. That all takes extra time and money.
Another alternative is for the arbitrator to order the parties to mediation before scheduling the hearing. I had a case where that solved the problem. In another case, the parties agreed in writing to forego mediation. That was an active waiver of the mediation condition precedent, again solving the problem.
The situation may get more complicated where one party simply refuses to mediate and uses that to delay resolution of the dispute.
One curious aspect of the Burke case is the court’s rejection of Mr. Burke’s argument that arbitrability was for the arbitrator to decide. As noted in an earlier article in this series, many federal circuit courts have held that, if the parties agree to AAA rules, they agree the issue of arbitrability is for the arbitrator. That’s what the AAA Commercial Rules say. And in Burke, the parties had agreed to use AAA’s Commercial Rules.
The Texas Appellate Court didn’t see it that way, though. Perhaps that was because the court was applying the Texas Arbitration Act rather than the Federal Arbitration Act. Or maybe no one made the argument to it. We don’t know.
Careful with those clauses – less may be more
What we do know is that arbitration clauses are not to be taken lightly. While the ability to craft a unique dispute resolution mechanism can be attractive, it can go wrong. If in doubt, it usually is best to start with the arbitral provider’s standard clause. (Have a look at AAA’s clause in the Commercial Rules you can find at adr.org.) You might dress it up by noting the number of arbitrators (single or a panel) and the place of arbitration. If you are worried the court might not know of all the precedent that arbitrability is for the arbitrator if you agree to use AAA rules (or the rules of other arbitral organizations – but check their rules for that), say that specifically.
There are plenty of other things you can put in your arbitration clauses if you like. For some ideas, look at AAA’s ClauseBuilder™ Online Tool (Google it). But often less is more when it comes to clauses. Once you get to arbitration, the rules of the organization generally provide for all the process you need to get your dispute resolved in a fair way.